Green-unready: On funding high-impact climate solutions

Synopsis: Fighting climate crisis needs high impact solutions led by entrepreneurs and start-ups. Hence, funding assumes critical importance.

Introduction

Addressing climate change requires a focus on reducing emissions and increasing carbon sinks. To reduce emissions, innovative solutions that are climate-ready and can be adopted at scale are the need of the hour.

Entrepreneurship can accelerate the lab-to-market transition of innovations and create scalable solutions for deployment.

But what is required is an integrated innovation curation, venture development, and capital access.

What is the major problem faced in commercialization of high-impact innovations?

Lack of funding: Innovators and entrepreneurs, particularly those harnessing science and technology to create high-impact solutions, have historically been underfunded. This leads to innovations stuck inside R&D labs, journal articles and patent offices, discouraging entrepreneurial risk-taking. Risk capital is most needed in commercializing high-impact innovations, but is least available at this stage. (Risk capital refers to funds used for high-risk, high-reward investments).

Why there is a lack of risk capital?

The following reasons keep most investors away from such early-stage investments,

i). Absence of impact-market thesis

ii). Poor innovation curation and sub-optimal venture development efforts by the ecosystem enablers

iii). Unrealistic expectations

iv). A wi­d­espread misunderstanding of risk-return trade-offs further worsen this gap bet­ween the capital providers and product start-ups.

v). High product development risk

vi). Longer gestation period

vii). Inability to foresee an exit horizon

viii). Poor assessment and pricing of risk

This leaves the state and philanthropy as the only source of capital to this sector.

What is required to push the transition of ideas from labs to markets?

High-impact climate solutions need a range of well-rounded, multi-stage financial and non-financial support from the ecosystem. Five principal elements that need to come together to support innovators and entrepreneurs are:

i). R&D and innovation pipeline,

ii). Venture incubation infrastructure,

iii). Focussed acceleration platforms,

iv). Multi-stage and blended capital pools, and

v). Multi-stakeholder partnerships for market access.

To achieve the above goals, a well integrated solution is needed. Having to make do with whatever funding is available, entrepreneurs often end up making wrong choices when it comes to funding sources, instruments and deployment, sometimes negatively influencing their strategic priorities. A more comprehensive, cohesive, patient and hybrid climate fund is needed

Source: This post is based on the article “Green unready” published in Business Standard on 10th September 2021.